Launching a startup? How to stay in business
Avoid those major mistakes
With over 30 million small companies in the U.S., you’d think that business owners would have enough to worry about — without adding survival odds to the equation, too.
The fact is, knowing your brand new startup company’s two-, four-, five-, and seven-year “odds of survival” can boost your chances of fixing the problems that knock many upstart companies out early.
According to the U.S. Small Business Administration, slightly over 50% of small companies stay in business for five or more years, and approximately 33% stay in business for 10 years.
Even so, 543,000 new businesses launch every year around the world, and every one one of them has a founder who believes he or she will buck the odds and make their company a durable and successful business — even though the odds are against that happening over the long haul.
“The reason for this is due to the business owner not putting the audience first,” says Ramesh Dontha, a serial entrepreneur and author of the book, The 60 Minute Startup.
Dontha says a startup founder’s job is to create customers by finding the consumer pain point, and both building and branding the business and its products and services wholly around it.
“From the surface level of the consumer pain point to the finer details of your offering, everything must be infused into the brand, its products and services, and finally into the marketing,” he says. Dontha classifies three key steps for any startup to achieve longevity.
— First step: Identify and restate the consumer pain point in your marketing message.
— Second step: Explain what is currently being offered by the competition and how it falls short.
— Third step: Demonstrate (show, don’t tell) why your product or service is superior to anything else existing in the marketplace.
“If implemented effectively, this approach will fill the gap and bring a new startup well to the ten-year mark and beyond,” he says.
Knowledge is king
Another key to startup sustainability is prioritizing what you need to know — then knowing it.
“Know the market, know the customer, know yourself and lastly, know your competitors, in this order,” says Jen Gouldstone, a startup entrepreneur who has launched multiple small businesses and current founder of Boston-based GardenStreets.com, a service and technology company.
Here’s how Gouldstone breaks down those four priorities:
- Pick a market that is growing, because it’s very hard to fight the economy or macro-trends. “Know your customer so you can offer them what they want,” she says. “Know yourself so you can hire for what you’re not good at. Know your competitors but don’t obsess over them.”
- Focus on cash flow and people. “In the early years, cash is king,” Gouldstone adds. “Develop your core product or service, but see if you can get early cash flow to help support your business. The best kind of cash comes from happy customers. Hire good people who are flexible. Make use of the gig economy to avoid fixed costs as much as possible without sacrificing quality.”
- Figure out why you’re starting this company. “A strong mission combined with a passionate founder in a growing market is a magnet for talent and success,” she says.
- Mistakes are unavoidable regardless of the stage of the company, but startups have less ability to recover from big mistakes. “Read your contracts and legal documents, especially when dealing with long-term or large deals,” Gouldstone adds. “Those are hard to recover from if they fail.”
Above all, Gouldstone emphasizes that new startup owners need to adopt a growth mindset. “If you don’t know now, you will later,” she says. “As long as you’re learning, you will improve, and if you improve enough, you will succeed.”
Smart financial management is a must
Another way to increase startup survival odds is by having a baseline of sound personal finance.
“Put simply, startups with broke founders are more likely to fail for obvious reasons,” says Calloway Cook, the owner of an angel-backed e-commerce venture that incorporated in January 2019. “For starters, most startups take two years minimum to achieve profitability, so if the entrepreneur can’t live for two or three years comfortably without an income, they should save more money before launching their venture.”
Startup founders with a healthy net worth to pull from have another advantage: They can reinvest all business profits back into the business at the outset rather than take some as salary. “This massively increases the chance that the business will succeed,” Cook says.
Cook also recommends that entrepreneurs thinking of launching a new business keep their day job while they pitch investors, if they choose to raise capital rather than bootstrap.
“Most entrepreneurs underestimate how long it takes to raise even a pre-seed round of a modest sum,” he notes. “Because of all the lawyers involved, expect it to take six months at an absolute minimum unless the investors plan to just write personal checks (which is rare).”
“Keep the day job until the investor checks clear and put in two weeks’ notice the next day,” he adds. “This absolves almost all of the personal financial risk at the outset of the startup.”
Lastly, don’t be afraid to fail
To savvy startup owners, failure in business really only happens if you don’t learn how to do it better next time.
“When properly viewed, a failure should test your assumption and hypothesis,” says Scott Royal Smith, founder and CEO of Royal Legal Solutions and host of the Real Estate Nerds podcast. “If you had a total failure, then it means that you were extremely far off from what is needed to start a business.”
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